FILED
United States Court of Appeals
Tenth Circuit
PUBLISH
June 23, 2010
Elisabeth A. Shumaker
UNITED STATES COURT OF APPEALS Clerk of Court
TENTH CIRCUIT
In re: JAMES RICHARD TROUT and
JENNIFER DAGMAR TROUT, FKA
Jennifer Dagmar Sommer,
No. 09-1332
Debtors.
_______________
SIMON E. RODRIGUEZ, Trustee
Plaintiff-Appellant,
v.
DRIVE FINANCIAL SERVICES, L.P.,
Defendant-Appellee.
________________________________
In re: PAUL B. BREMER and
SUZANNE M. BREMER, also known as
Suzanne Marie Bremer, formerly known
as Suzanne Marie Buckley, formerly
known as Suzanne Marie Crow,
Debtors.
_______________
SIMON E. RODRIGUEZ, Trustee No. 09-1334
Plaintiff-Appellant,
v.
DAIMLERCHRYSLER FINANCIAL
SERVICES AMERICAS LLC,
Defendant-Appellee.
________________________________
Appeal from the Bankruptcy Appellate Panel for the Tenth Circuit
(BAP Nos. 08-080-CO and 08-081-CO)
David V. Wadsworth, Sender & Wasserman, Denver, Colorado, for Plaintiff-Appellant.
Jack L. Smith, Holland & Hart, and Stephen P. Hale, Hale Dewey & Knight, Memphis,
Tennessee, (Stephen G. Masciocchi and Rochelle N. Rabeler, with him on the brief), for
Defendants-Appellees.
Before BRISCOE, Chief Judge, HAWKINS* and O’BRIEN, Circuit Judges.
HAWKINS, Senior Circuit Judge.
In these consolidated cases, the bankruptcy trustee (“Trustee”) appeals from a
decision of the Bankruptcy Appellate Panel (“BAP”) affirming the bankruptcy court’s
determination that, having successfully avoided a preferential vehicle lien under 11
*
The Honorable Michael Daly Hawkins, Senior Circuit Judge, United States
Court of Appeals for the Ninth Circuit, sitting by designation.
2
U.S.C. § 547,1 the Trustee was not entitled to a money judgment equal to the value of the
avoided liens under § 550(a). The bankruptcy court and the BAP held that the bankruptcy
estate had been sufficiently returned to its pre-transfer status by avoiding the preferential
lien and stepping into the lien priority of the avoided creditor under § 551. We affirm.
FACTS AND PROCEDURAL HISTORY
The facts of both cases are similar and straightforward. In each case, the debtors
purchased a vehicle with a loan, but the lender appellees did not perfect their liens within
30 days after the debtors received possession, resulting in their liens being perfected and
considered a “transfer” within 90 days of the debtors’ petition dates. See § 547(b)(3),
(e)(2)(B). Thus, the Trustee filed adversary actions against the lenders, seeking (1)
avoidance of the lien under § 547, (2) recovery of the value of the avoided lien as of the
petition date under § 550(a), (3) preservation of the lien for the benefit of the estate under
§ 551, and (4) recovery of pre-petition payments made by the debtors to the lenders under
§ 547.2
1
Unless otherwise noted, all section references are to 11 U.S.C. and “Code” refers
to the Bankruptcy Code.
2
Although in the complaint the Trustee appears to seek both the lien and a
monetary award of the value of the lien, the Trustee acknowledges on appeal that under §
550(d)—which permits only a single recovery—it cannot receive both and acknowledges
it would have to abandon the § 551 preserved lien if it obtained a monetary award for the
value of that lien under § 550.
3
The lenders and Trustee settled the claim for pre-petition payments, and it was
dismissed. The Trustee then sought summary judgment on the remaining three claims.
The lenders did not contest the Trustee’s ability to avoid the lien and preserve it for the
benefit of the estate, and thus the court granted summary judgment to the Trustee on the
first and third claims. This appeal therefore focuses on the availability of § 550(a) relief;
specifically, whether in these circumstances, such relief is required (the Trustee’s
position), permissive but only with respect to possessory property interests (the
bankruptcy court’s view), or permissive with respect to both possessory and non-
possessory interests, but unnecessary on these facts (the view of the BAP).
The bankruptcy court compared the remedies available in § 550 (recovery of
property or its value) and § 551 (automatic preservation of avoided transfer for benefit of
the estate) and concluded that in cases where the transfer is of a nonpossessory lien
interest, “the preservation of [the] lien interest for the benefit of the estate is sufficient to
place the estate in exactly the same position it would have been in, but for the granting of
the lien. There is, under these circumstances, no need for the Trustee to ‘recover’ any
property or its value.” Rodriguez v. Drive Fin. Servs. LP (In re Trout), 392 B.R. 869, 871
(Bankr. D. Colo. 2008); Rodriguez v. DaimlerChrysler Fin. Servs Americas, LLC (In re
Bremer), 392 B.R. 873, 875 (Bankr. D. Colo. 2008). The bankruptcy court denied
summary judgment on the Trustee’s second claim for relief and dismissed the claim.
4
The cases were consolidated on appeal, and the BAP affirmed the bankruptcy
court, though on a slightly different basis. The BAP agreed with the bankruptcy court
that recovery under § 550 was not mandatory but permissive. But the BAP did not
consider relief under § 550 and § 551 to be mutually exclusive and declined to hold that
relief under § 550 was completely unavailable in the case of nonpossessory lien interests.
Rather, the BAP recognized that although ordinarily lien avoidance and preservation
under § 551 will be sufficient, there may be circumstances in which § 547 and § 551 will
not put the estate back to its pre-transfer position, and then some recovery under § 550
could be appropriate. See In re Bremer, 408 B.R. 355, 358-360 (10th Cir. BAP 2009).
Nonetheless, the BAP concluded that, on the facts of this case, the bankruptcy
court did not abuse its discretion by determining that the avoidance/preservation remedy
was sufficient. The BAP noted that the lenders, as secured creditors, had contractual
rights against the vehicle, and that by avoiding the lien interest (which then became
preserved for the estate), the Trustee succeeded to those rights, but no more and no less.
The BAP noted that although the value of the security interest (the vehicle) may have
declined, the Bankruptcy code does not guarantee that assets recovered would be worth
what they were at any relevant valuation date, only that the estate will be returned to its
pre-transfer position. Id. at 360-61.
This appeal followed.
5
STANDARD OF REVIEW
We review the legal conclusions of the bankruptcy court and BAP de novo, Fowler
Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir. 1996), and we review
discretionary decisions for an abuse of discretion, see Armstrong v. Rushton (In re
Armstrong), 304 B.R. 432, 435 (10th Cir. BAP 2004).
DISCUSSION
Several bankruptcy code provisions work together to protect the bankruptcy estate
from preferential transfers made within ninety days of filing the bankruptcy petition.
First, under § 547, the trustee may avoid “any transfer of an interest of the debtor in
property.” Once avoided, that transfer is automatically preserved for the estate under §
551, which provides: “Any transfer avoided under section . . . 547 . . . is preserved for the
benefit of the estate but only with respect to property of the estate.” In the case of an
avoided security interest or lien, as here, § 551 ensures that a trustee avoiding a senior
lien moves into that priority position and the estate is not trumped by the interest of a
junior lien. See Morris v. St. John Nat’l Bank (In re Haberman), 516 F.3d 1207, 1210
(10th Cir. 2008).
In addition to these remedies, 11 U.S.C. § 550 (a) also provides:
[T]o the extent a transfer is avoided under section . . . 547 . . . the trustee
may recover, for the benefit of the estate, the property transferred or, if the
court so orders, the value of such property.
6
The Trustee argues that the bankruptcy court must award the estate some relief
under § 550, either return of the property or a monetary award of the value of the
property. The bankruptcy court concluded that § 550 recovery is permissive rather than
mandatory, and that § 551 and § 550 are mutually exclusive provisions, with § 551
applying to nonpossessory lien interests and § 550 applying only to possessory property
interests. The BAP concluded that § 551 is automatic and usually sufficient to restore the
estate’s pre-transfer position, but that there may be circumstances involving
nonpossessory liens in which the Trustee is also entitled to permissive recovery under §
550(a). As we explain more fully below, we believe the BAP has the better argument in
light of the statutory language and the underlying purposes to be served by these
provisions. In addition, the BAP’s position is the most consistent with the opinions of
other circuits who have considered the issue.
The bankruptcy court and BAP correctly noted that under § 551, the transferred
lien was automatically “preserved for the benefit of the estate,” whereas recovery under §
550 is not automatic and requires action by the trustee. See §§ 551, 550(f); see also
Suhar v. Burns (In re Burns), 322 F.3d 421, 427-28 (6th Cir. 2003). The courts also
correctly concluded that the language in § 550 is permissive rather than mandatory: if a
transfer is avoided under § 547, “the trustee may recover” the transferred property or its
value. As the BAP explained:
7
The word “may” is generally used in the permissive or discretionary sense.
Use of the word “may,” rather than “shall” or “must” next to the word
“recover” denotes that recovery is not mandatory.
408 B.R. at 359. The Sixth Circuit reached the same conclusion in In re Burns,
commenting that the language of § 550 is “permissive rather than mandatory (the trustee
‘must’ recover) or descriptive (the trustee ‘thereby’ recovers).” 322 F.3d at 428; see also
USAA v. Thacker (In re Taylor), 599 F.3d 880, 890 (9th Cir. 2010) (“A trustee, however,
has the discretion to seek an alternative remedy under § 550 (‘the trustee may recover . .
.’)”).
The Trustee argues, however, that the bankruptcy court must award the estate some
recovery under § 550(a), whether it is a return of the property (in this case, the lien) or the
property’s value. The Trustee claims that § 551 is only a priority statute, rather than a
remedial one, and thus even with non-possessory liens, some further action under § 550 is
required. While § 551 does prevent junior lienholders from leap-frogging the estate in the
event a senior lien is avoided, this does not mean that § 551 does nothing remedial for the
estate. As we explained in In re Haberman, upon avoidance of a lien, under § 551 the
trustee “steps into the shoes of the former lienholder, with the same rights in the
collateralized property that the original lienholder enjoyed.” 516 F.3d at 1210. Thus, as
we discuss further below, in situations in which avoidance of the lien and its preservation
for the estate are sufficient to make the estate whole, the trustee may not need to seek
8
recovery under § 550, or, stated differently, relief under § 550 (to wit, return of the
property) might be simply duplicative of what the trustee has already received through §
547 and § 551.
In arguing that § 550(a) relief is mandatory, the Trustee also relies on an Eighth
Circuit decision, Halverson v. Le Sueur State Bank (In re Willaert), 944 F.2d 463 (8th
Cir. 1991), in which the court held that once a transfer is avoided:
the court must fix the transferee’s liability under section 550(a). Although
the bankruptcy court has discretion under section 550(a) to remedy a
preferential transfer by ordering either the property or its value returned to
the bankruptcy estate, the court does not have discretion to order neither
remedy.
Id. at 464.
Although this quotation literally supports the Trustee’s argument, the context in
which it was written is quite distinguishable. There, the avoided interest was a
preferential mortgage, but the real estate had already been sold and the mortgage fully
satisfied. Id. Thus, there was no remaining lien to be “preserved” for the estate under §
551, and the court simply had no occasion to discuss whether relief under § 550 might be
unnecessary in light of § 551 under different circumstances. Rather, the bankruptcy
court had believed its hands were tied since the property and lien were gone, and the
Eighth Circuit reversed because the lower court had failed to recognize it could have
awarded the value of the avoided interest under § 550 instead. Id. Indeed, as we discuss
9
below, the BAP here specifically recognized this factual scenario as a situation in which §
551 will be insufficient to compensate the estate and recovery under § 550(a) available
instead. See 408 B.R. at 360.
Our conclusion that § 550 recovery is permissive rather than mandatory does not
end our inquiry. We must also consider whether § 550 relief is available at all in the case
of nonpossessory liens such as those involved in this case. The bankruptcy court drew a
bright line, reasoning that because § 551 automatically preserved an avoided lien for the
estate, § 550 must apply only in the context of possessory property interests; in other
words, relief pursuant to the two provisions must be mutually exclusive.3
The bankruptcy court’s interpretation, however, is unduly restrictive and
contradicted by other Code provisions. The Code itself contains no explicit
possessory/nonpossessory distinction between § 550 and § 551. A lien interest is
3
The bankruptcy court reasoned:
If the avoided transfer was the granting of a lien, the lien under § 551 is
“automatically” preserved for the estate. It makes no sense to say, in turn, under §
550(a) the “trustee may recover the property transferred [i.e. the lien] or the value of
[the lien].” If the lien, once avoided, has automatically been preserved for the estate
under § 551 and become property of the estate under § 541(a)(4), how could § 550(a)
contemplate the trustee would “recover the property transferred” or its value? . . .
Leaving the consequences of lien avoidance to § 551 alone, and allowing a trustee the
recovery remedies of § 550(a) only where possessory interest in property are avoided,
eliminates the strained application of these two sections of the Bankruptcy Code. . . .
In re Trout, 392 B.R. at 872-73; In re Bremer, 392 B.R. at 875-76
10
“property” under the Code, see §§ 547(b), 541(a), and § 550 permits recovery of
transferred “property” or its value. In addition, § 545—which exclusively covers
avoidability of statutory liens—is included in the class of statutes to which § 550(a)
applies, which would make little sense if § 550(a) applied only to possessory interests.
Rather, as the BAP and several other courts to consider the issue have recognized,
§ 550(a) provides the bankruptcy court with flexibility to fashion a remedy so as to return
the estate to its pre-transfer position. The provision indicates the trustee may recover the
property, or, if the court so orders, the value of the transferred property instead. As the
BAP here noted, ordinarily in the case of an avoided lien, the estate will be returned to its
previous position by simply avoiding the preferential lien and no further recovery will be
necessary, but there may be circumstances where that remedy will be insufficient and
recovery under § 550 needed instead. 408 B.R. at 359-60; see also In re Burns, 322 F.3d
at 427 (noting that “the trustee’s remedy of recovery is necessary only when the remedy
of avoidance is inadequate” and that in cases involving nonpossessory creditors, “trustees
will generally not have to seek recovery” under § 550) (emphasis added); In re Taylor,
599 F.3d at 890-91 (approvingly quoting the BAP’s decision in this case and agreeing
that § 550 gives the court discretion whether to award recovery, which type of recovery to
award, and that there could be circumstances in which § 551 would be inadequate to
restore the bankruptcy estate to its pre-transfer position).
11
The BAP identified several circumstances in which lien avoidance/preservation
under §§ 547/551 could be inadequate and a bankruptcy court could, in its discretion,
order monetary recovery of the value of the property under § 550(a) instead. The BAP
cited as an example Tidwell v. Chrysler Credit Corp. (In re Blackburn), where a lien on
the debtor’s pickup truck was avoided, but the dealer had, prior to the petition,
repossessed the vehicle and sold it to a good faith purchaser. 90 B.R. 569, 573 (Bankr.
M.D. Ga. 1987). Because avoidance and preservation of the lien was no longer a viable
option in that case, the court awarded the value of the vehicle under § 550.4 The BAP
went on to identify other possible situations in which the court might properly award the
value of the transferred property under §550(a):
Over the years, courts have decided that recovery of property or its value is
appropriate in various other circumstances. When the record is devoid of
evidence on the property’s market value or when conflicting evidence exists
on the value of the transferred property, courts have ordered the property to
be returned. Where the property is unrecoverable or its value diminished by
conversion or depreciation, courts will permit the recovery of value.
Another circumstance for awarding the value is when the value is readily
determinable and a monetary award would work a savings for the estate.
408 B.R. at 360 (citations omitted); see also Morris v. Kan. Drywall Supply Co., Inc. (In
re Classic Drywall, Inc.), 127 B.R. 874, 877 (D. Kan. 1991) (discussing same factors).
4
Note that this approach is also consistent with that taken by the Eighth Circuit in
In re Willaert, which ordered § 550 recovery where the real estate securing an avoided
mortgage had been sold. 944 F.2d at 464.
12
The Trustee alternatively argues that although the BAP correctly identified a
number of factors to consider in whether to award the recovery of property versus its
value, it failed to then properly evaluate the circumstances of this case against those
factors. Specifically, the Trustee contends it should have been awarded the value of the
lien because the collateral securing the lien has depreciated in value. We disagree.
“Bankruptcy courts have consistently held that 11 U.S.C. § 550 is designed to
restore the estate to the financial condition that would have existed had the transfer never
occurred.” See Official Comm. of Unsecured Creditors v. Citicorp N. America, Inc. (In re
TOUSA, Inc.), 422 B.R. 783 (Bankr. S.D. Fla. 2009) (citation omitted). The “property”
that was transferred here was the perfected security interest. The Trustee makes a number
of arguments and hypotheticals based on the declining value of the collateral, but the
vehicle itself was never transferred.5 The bankruptcy estate would have had an asset
which was declining in value regardless of whether the debtor transferred the lien during
the preference period. Rather, by virtue of the transferred security interest, a creditor
obtained a leg-up over unsecured creditors in the impending bankruptcy; when that lien
5
We note that the cases cited by the BAP involving depreciation as a
consideration in awarding monetary relief under § 550(a) also involved transfers of
physical property and not security interests. See First Software Corp. v. Computer Assoc.
Int’l, Inc. (In re First Software Corp.), 107 B.R. 417, 423-24 (D. Mass. 1989); Gennrich
v. Mont. Sport, U.S.A., Ltd. (In re Int’l Ski Serv., Inc.), 119 B.R. 654, 658 (Bankr. W.D.
Wis. 1990); see also In Re Classic Drywall, Inc., 127 B.R. at 876.
13
was avoided and preserved for the benefit of the estate, that creditor had to take its place
with the general unsecured creditors, and, having obtained § 547 and § 551 relief, the
Trustee gained priority over any junior liens on the same collateral.
As the cases discussed above recognize, there may be situations in which the
avoidance of the lien will not suffice to restore the estate to a pre-transfer situation,
especially when the collateral securing the lien is gone or the lien itself has been paid in
full. See, e.g., In re Blackburn, 90 B.R. at 573; In re Haberman, 516 F.3d at 1208-09.
However, as the BAP here reasoned, the Code “does not guarantee that assets recovered
will be worth what they were at any relevant valuation date;” it only ensures that the
estate will be back in the same place as if the transfer had not occurred. 408 B.R. at 361.
Certainly, depending on the passage of time, the collateral may have devalued, but that
would have happened even if the debtor had never transferred the security interest. See
In re Haberman, 347 B.R. 411, 417 (10th Cir. B.A.P. 2006) (“[T]here is always a risk that
any great delay in the recovery of collateral may result in diminution of its value. That,
however, is a risk that any creditor would have, and the Trustee should not be elevated to
a higher position.”), aff’d 516 F.3d 1207 (10th Cir. 2008).6 Moreover, as the BAP here
6
We recognize that the time it takes to avoid the security interest could result in
additional devaluation. In cases involving some inordinate delay, then there could
conceivably be reason to award value to compensate for the decline that occurred in the
interim. Though not entirely clear, this notion seems to be at play in the Ninth Circuit’s
recent decision In re Taylor, in which nearly two years elapsed between the filing of the
14
suggested, unlike a trustee who lacks access to the collateral because it has been
physically transferred, if a trustee seeking to avoid a preferential security interest were
concerned about serious depreciation, the trustee could likely protect itself by selling the
collateral and holding the proceeds in escrow while waiting for the adversary proceeding
to be resolved (and thereby minimizing the need to resort to § 550(a) for protection). 408
B.R. at 361; see also 11 U.S.C. § 363.7
Moreover, as other courts have also recognized, the language of § 550 (a) suggests
that the default rule is the return of the property itself, whereas a monetary recovery is a
more unusual remedy to be used only in the court’s discretion. Section 550(a) indicates
that a trustee may recover “the property, or if the court so orders, the value of the
property transferred.” (emphasis added); see Terry v. Meredith (In re Meredith), 367 B.R.
bankruptcy petition and the court finding the transfer avoidable (the trustee there waited
seventeen months before seeking avoidance). 599 F.3d at 886-87. The Ninth Circuit
suggested that a monetary award under § 550 was not an abuse of discretion because of
the depreciating asset and because the lien had been paid down in the interim, but
ultimately reversed the award under § 550 because “the value of the security interest at
the time of the filing of the bankruptcy petition [was] not readily ascertainable” from the
record. Id. at 891-92.
7
Although the Trustee expresses doubt that it could protect itself in this manner,
this skepticism appears based on scenarios not present in this case, such as if the debtor
had entered into a reaffirmation agreement and was making payments to the lender, or if
the lender had a complete defense to the avoidance action. We express no opinion on
factual circumstances other than those before us, but note that in future cases, the
bankruptcy court, in its discretion, will be able to consider the myriad of factors and
determine whether a monetary award might be more appropriate in other instances.
15
558, 563 (Bankr. E. D. Va. 2007) (“This language evinces a Congressional preference
that the property itself be returned to the estate, the value of the property being an
alternative only available by court order.”); see also Asarco LLC v. Americas Mining
Corp., 404 B.R. 150, 162-63 (Bankr. S.D. Tex. 2009); Gen. Indus., Inc. v. Shea (In re
Gen. Indus., Inc.), 79 B.R. 124, 135 (Bankr. D. Mass. 1987), superseded by statute on
other grounds, Mass. Gen. Laws ch. 109A § 3; In re Vedaa, 49 B.R. 409, 411 (Bankr.
N.D. 1985).
Even if a bankruptcy court could, in its discretion, award the value of the lien in
the circumstances presented here, this does not establish that it is required to do so; the
choice of a § 550 remedy remains in the court’s discretion. See In re Classic Drywall,
Inc., 127 B.R. at 877 (no abuse of discretion where factors cut both ways and court
decided award of value was appropriate). Here, the Trustee has presented no compelling
reason to deviate from the default rule of returning the transferred property itself, and the
bankruptcy court did not abuse its discretion by concluding that the avoidance of the lien
was sufficient and declining to order a monetary recovery.
Before the transfer of the security interest here, the estate had a depreciating asset
and an obligation to an unsecured creditor. After the transfer, the estate still had the asset
but a creditor had a secured priority interest in that asset. After avoidance of the lien, the
estate once again had a depreciating asset and an unsecured obligation to the lender.
16
Thus, as the BAP and the bankruptcy court concluded, on these facts, nothing more was
required to put the estate back in its pre-transfer position.
AFFIRMED.
17